Coordinating Bank Failure Costs and Financial Stability

27 Pages Posted: 1 Nov 2011

See all articles by Iman van Lelyveld

Iman van Lelyveld

De Nederlandsche Bank; Vrije Universiteit Amsterdam

Marco Spaltro

Bank of England

Date Written: August 1, 2011

Abstract

Banking groups have become increasingly multinational but the institutional infrastructure to deal with solvency or liquidity problems is still largely national. This might lead to financial instability if national authorities do not internalise externalities abroad. Recently ex-ante burden sharing agreements have been established (e.g. EFSF), but little empirical work has been done on potential costs and benefits of such agreements. We estimate the costs and benefits of financial stability support for large, internationally active banks under several proposed agreements. We show costs according to the ‘national solution’, where only home authorities inject capital, as our benchmark. ‘Specific’ sharing agreements would be redistributive at the expense of smaller and East European countries (not home to large cross-border banking groups). The ‘general fund’ mechanism will smooth costs across countries but may lead to unequal redistribution of costs. We also show that coordinating bank failure costs may bring about financial stability benefits.

Keywords: Burden sharing, crisis resolution, cross-border banks

JEL Classification: F55, G18, G21

Suggested Citation

van Lelyveld, Iman and Spaltro, Marco, Coordinating Bank Failure Costs and Financial Stability (August 1, 2011). De Nederlandsche Bank Working Paper No. 306. Available at SSRN: https://ssrn.com/abstract=1951898 or http://dx.doi.org/10.2139/ssrn.1951898

Iman van Lelyveld (Contact Author)

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

Vrije Universiteit Amsterdam ( email )

Netherlands

Marco Spaltro

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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